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An Introduction to Supply Chain Management

S. ViswanathanW. Watthayu

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What is Supply Chain Management?

Supply Chain Management (SCM) is concerned with three core aspects of a company’s operations:

Material SupplyGoods ProductionProduct Delivery to Customers

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A more formal definition is:

“Integrated Supply Chain Management is a processing-oriented, integrated approach to procuring, producing and delivery products and services to customers. It has a broad score that includes sub-suppliers, suppliers, internal operations, trade customers, retail customers, and end users. It covers the management of material, information and funds flows”

By Peter Metz “ Demystifying Supply Chain Management”

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Another description of SCM is:

“Effective SCM enables you to make informed decisions along the entire supply chain from acquiring raw materials to manufacturing products to distributing finished goods to the customers”

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A familiar household example

Of course, supply chain management ideas also occur in all walks of life and thus the basic concepts will be very familiar to the reader.

As a trivial example, consider the problem of supplying bread and milk to a household

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There are many options available, for the above task e.g.

Have the items home deliveredBuy the items at the corner store each dayPick them up at a service station when

purchasing gasoline for the family carPurchase them in bulk every 2 or 3 days

from a large supermarketPurchase via e-commerce over the

Internet

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There are various competing issues that might be considered:

Reliability of supplyFreshness of the productCostConvenienceCapacity to combine this task with

other functionsAvailability of diversity and variety

in the products, etc.

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SCM is the topic of importance

One can readily imagines that if one application applies the same kind of thinking to the manufacture of a sophisticate item, then the issues become considerably more complex but also potentially more important.

Indeed, one can readily understand that making the decision could be of considerable commercial importance and, indeed, could sometimes make the difference between staying in business or loosing out to competitors

“Thus SCM is the topic of importance”

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Costs?

SCM is not a trivial matter. The costs of taking this issues seriously can be substantial. Hence, it is important to be able to make the right kind of decisions about the extent to which one embraces this technology.

In this context, theses notes are intended as a preliminary guide to aid decision making.

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Route to SCM

From the many literatures, we can identify three routes that one might follow to introduce SCM into a company. These are:

1. Via the optimization of the utilization of existing facilities

2. Via the use of new technologies e.g. the Internet and e-commerce

3. Via a major restructuring

These are further explained on the next three slides.

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Optimization of Existing Resources

SCMOptimization of

the existing facilities Little restructuring

required

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Use of new computer and communication technologies

Electronic and otherIntermediaries e-commerce

May lead to the needfor restructuring

New computerTechnologies,Internet

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Inadequate or Old infrastructure

New manufacturing Technologies such

as agile manufacturingPostponement, etc

Major restructuring

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The Supply Chain Council

A possible source of information on SCM is the supply chain council

Supply Chain council Inc.303 Freepport RoadPittsburgh, PA 15215http://www.supply-chain.org

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Characteristic of Poorly Performing Supply Chain

Excess inventoriesLong cycle timesStockouts and product substitutionsInefficient plant schedulingExcess capacityLTL deliveriesHigh transaction costsetc.

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The issue in Supply Chain Optimization

Plan

Source Make Deliver

Four core management processes

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Stages in development of SCM

Inter-relating Warehousing and Transportation Shorter order response times via faster

warehouse handing and faster transportation lessens the length of forecast period and increase accuracy of forecast. Aided by improved data communications between different levels of warehouse (plant, regional distribution centers, locate distribution center).

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Stages in development of SCM (cont.)

Logistics Stage Addition of manufacturing, procurement

and order management functions. Aided by electronic data interchange, worldwide communications, and use of computers to store, retrieve and analyze data.

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Stages in development of SCM (cont.)

Integrate SCM Add supplier and end customers.

Utilizes electronic data, electronic funds transfer, computerized decision support systems

Key driver: Explosive development of computer and communications technology

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Success Stories Some claims made for the success of SCM

principles are given below: Inventory reduced by 50 percent Supply chain total cost share of revenue

reduced 20 percent 40 percent increase in on-time deliveries Cumulative cycle time reduced by 27 percent Revenues increased 17 percent Inventory turns up 2x while out-of-stock

incidents down 9x 50 percent reduction in finished-good inventory

by postponing package

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Key factors associated with Claimed successes

Five key factors enabling these accomplishments1. An overriding, pervasive customer focus. At

every stage in the supply chain, the ultimate customer’s needs are understood and forced into the decision making

2. Advanced use of IT. Data and information flow readily to all parts of the supply chain. Computer-aided decision support systems use this complex information to enable better, faster decision that are quickly communicated throughout the supply chain

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Key factors (cont.)

3. Quantitatively based performance management. Measurements of multiple performance factors occur frequently at each stage in the supply chain. Time and cost are key measures, but others are used as appropriate to the specific supply chain. All measures relate to the ultimate supply chain goals.

4. Use of cross-functional teams. Teams of people from the interrelated functional operations working closely together can cut through the normal organizational barriers to find local and distributed improvements that benefit the overall supply chain performance

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Key factors (cont.)

5. Attention to human factors and organization dynamics. Use of the best human and organization, coordination, cooperation, measurement, reward techniques facilities, supply chain innovation and implementation. This level of attention is needed to offset the tendency of individual accountability and work-unit accountability to create barriers to supply chain cooperation.

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Static or Dynamic SCM

SCM can be static or dynamic: Static- i.e. based on steady state

understanding of demand, cost, location etc., or

Dynamic – supply chain reconfiguration to adapt to changing conditions, e.g., fluctuations in cost of raw materials, customer demands, international exchange rates, etc.

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Innovative Supply Chain Strategies

Effective use of Information Flows EDI Bar Coding Shipment Container Making

Strategic Supply Chain partnerships to share information.

Advanced manufacturing technology and order processing systems to reduce order cycle time- improve forecasting

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Innovative Supply chain Strategies (cont.)

Vendor management inventoryContinuous ReplenishmentQuick Response (QR) SystemEfficient Consumer Response (ECR)Category ManagementConsolidationCross-DockingPostponement

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Principle of Postponement

The time of shipment and location of final product processing in the distribution of a product should be delayed until a customer order is received.

Time Postponement: Avoid shipping goods in anticipation that demand will occur. Time based logistics.

Form Postponement: Avoid creating the final form of the product until demand occurs. Delay differentiate or manufacturing postponement

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Postponement

Postponement as a concept has existed since the 1950’s

It is only the recent past that it has gained lot of attention due to its application in practice

Postponement enables reducing of inventories

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Consolidation

Enables saving in unit transportation costs by transportation bulk quantities

Consolidate small orders into large shipments, e.g. Federal Express

Hub and Spoke NetworksMany logistics Hub in the world acts

as consolidation points

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Cross docking

Cross-docking: is an advanced concept in warehouse that combines the benefit of consolidation, without incurring the cost of excess inventories

Product move right from the inbound to the outbound dock without every staying in the warehouse

Walmart practices cross-docking very effectively

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Key enables in Supply Chain innovations

Standard Product ID: Bar codese.g item, case, etc.

Electronic Data Interchange (EDI)Electronic Commerce: The Web,

private networksInformation systems: Enterprise

Resource Planning(ERP), advanced planning and scheduling software, data mining

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SCM Software

A report written in 1998 (Eric Allen, University of Texan at Austin) predicts that the demand for SCM software will have reached $3 billion by 2000

SCM software is aimed at: reducing distribution cost maximizing order deliveries maintaining inventory balance maintaining customer and supplier

satisfaction

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Suppliers of SCM software include (based on 1998 data):

I2 - (founded in 1988, now with 6000 employees, sales of $184M in 1997)

Manugistics (founded in 1969 originally called Scientific Time Sharing Corporation, sales level of $94M in 1997)

Baan ( founded 1978, $684M in 1988)SAP (founded Germany 1972 by 4 former

IBM employees)People Soft (founded in 1987)

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Note that the price to implement a full SCM solution can be large (up to a million dollars) However, lower cost solutions are , of course, also available.

Next we focus on a case study in SCM solution and examine possible SCM issues.

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Case study-Wal-mart

Leading discount retailerSupply chain Structure: Hub-and-

Spoke arrangement of one distribution center surrounded by several stores.

Cross Docking strategyVery efficient Logistics ManagementEvery Day Low priceVendor management inventory

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Case Study – Dell Computer

Use electronic commerce/Telemarketing for sales, marketing, ordering and billing

Suppliers located within 15 minutes of plant in Round Rock, Texas

Cycle time of about a day (not counting delivery time)

Inventory equivalent to 13 days of sales (versus 25 days for Compaq)

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Dell-computer (cont.)

Can beat competitor’ s prices by 10-15%

Reduced number of supplier’s from 204 in 1992 to 47 in 1997

Orders parts Just-In-Time ( when order is received) Parts are 60 days newer that competitors Rapid price decreases: save 6% on parts

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Dell Computer (cont.)

Converts sales into cash in less than 24 hours through use of credit cards and electronic payment Compaq (using dealers): 35 days Gateway: 16.4 days

In 1996, revenue jumped 47% to $7.8B, and profiles jumped 91% to 518M. A big favorite in the stock market